BoE Flags Spillover Risks from Hedge Fund Leverage in UK Gilt Market

The Bank of England (BoE) has warned that elevated hedge fund leverage in the UK government bond market, combined with exposures to artificial intelligence assets and corporate debt, could increase the risk of stress spreading across financial markets.

In its latest financial stability assessment, the central bank said the interaction between vulnerabilities across different markets meant that strains could crystallise simultaneously, increasing the potential for a sharp market adjustment.

Hedge fund leverage in the gilt market has remained broadly stable, according to the BoE, but continues to sit at elevated levels. The central bank said the interconnected nature of market vulnerabilities meant the risk of a significant repricing remained.